lorem ipsum

Issue 2, November 2012 issue #, date

THE BULL.
The monthly student run journal for business and economics students
Mauris nec nisl a tellus eleifend mollis.

Proudly produced by the Finance and Banking Society Australian National University Quisque:

Financial statement manipulation the basics By Shananon Norabhoompipat

Issue, Date From the editor:

Here at FINSOC, weve had a great year of events. This includes our first ever Investors Night series as well as networking events with JP Morgan, Goldman Sachs and more. Turn to page 4 to read some words of wisdom from 2 outgoing president Nathan Lau and see who will be running FINSOC next year!

Feugiat:

This is our last edition for 2012 and we hope youve enjoyed reading THE BULL. Well be back next year with a special O-week edition at Market Day but in the meantime, study hard and 3 have a great holiday once exams are all over!
Publication officer Shananon Norabhoompipat with Dr. Mark Wilson

- Phoebe

Many investment bankers and analysts take companies financial statements as given when they make decisions. They may not realise that those statements can be manipulated, which consequently affects the outcome of their decision. In this months edition, THE BULL has the privilege of talking to Dr. Mark Wilson, senior lecturer at the ANU Research School of Accounting and Business Information Systems. Dr. Wilson defines financial statement manipulation as the intervention in the reporting process or real time transaction, with the intention to mislead some stakeholders (investors, competitors, employees, society) or to affect contractual outcomes (with suppliers and lenders). Financial statement manipulation can be classified into two ways: the accruals and the real transactions.

4 Feature Articles:
Financial statement manipulation with Dr. Mark Wilson The Last Word: Nathan Lau Buffet and Berkshire Hathaway: Luck or Skill? A beginners guide to Personal Branding

lorem ipsum
To manipulate the accruals, Managers may change different items that affect revenue and expense, to influence profit. The disclosure aim of the company is not to maximize profit, but to smooth earning. They intend to make profits in different years look like they are close to each other. This will make the company and its profits look less risky from the perspectives of both equity holders and debt holders, as they are less volatile. Some examples of accrual manipulation: 1. Alter the allowance for doubtful debts: If the allowance has been reduced, bad debt expense will decrease, causing the profit to increase. 2. Lower the depreciation rate and do not acknowledge impairment loss: This can overstate profit. 3. Manipulate revenue recognition: Revenue is recognized when customers pay on credit (even if the default probability is high) and the earning process has not been completed. Again this can overstate profit. The real transactions can also be manipulated in various ways, as below:

issue #, date

Citibank put its debts in the Cayman Islands, where there are no disclosure requirements, during the global financial crisis. Dr Wilson emphasized that although financial statement manipulation was not the cause of loss during the global financial crisis, it increased the scale of losses. It incentivized people to engineer complex financial instruments, as to cover up their losses. He believed that the financial crisis would be a different story without financial statement manipulation. In order to not get deceived by financial statement manipulation, Dr Wilson gave some tips for finance students.

1. Pay close attention to the financial statements of various firms when making decisions. The companys 1. Defer or bring forward inventory purchases to decrease or earnings can be compared with its cash flow performance. If its earnings go up while cash flow is increase cost of sales and increase or decrease profit (in flat, this is a sign that the companys accruals may order to smooth earnings). have been manipulated. 2. Sales of non-current assets to inflate profit. 2. Examine the incentives of the people who write the 3. Channel stuffing, or sending too much stock to customers, reports. If the CEO gives employee stock options for managers, the managers would want the share price to to boost revenue. be greater than their strike price, so they can buy the 4. Take items off the balance sheet. An example is to sell shares cheaper. They can inflate profit to give accounts receivable to financial institutions. This can be investors confidence to invest in the company. Their done in two ways: non-recourse (the default risk is demand will drive up price. transferred to the bank, as it gives the money on credit sales 3. Consider whether managers try to inflate earning to back to the company in exchange for the service fee) and meet the analysts earning forecast. recourse (the bank has been employed to collect debts for the company, while the risk is still with the company). This 4. Take more accounting courses, as BUSN1001and reduces bad debt expense and overstates profit. BUSN 1002 are not sufficient. Dr. Wilson took this opportunity to mention his course BUSN2036 5. Conceal debts. Consider how Enron, a large American Financial Statement Analysis (only BUSN1002 as a energy company, transferred a large portion of its subsidiaries out of its consolidated group in order to keep its pre-requisite), which will be offered in the second good assets and hide its liabilities. Debts were transferred to semester of 2013. His course will train business students in fundamental analysis and valuation Special Purpose Vehicle (SPV). Enron obtained all the profits from those firms, but it did not need to be responsible techniques so students will be able to analyze firms for their debts. It claimed that it had non-voting rights, even financial statements in depth and make betterthough it owned 97% of the SPV. Another example is how informed decisions. n

2 2

lorem ipsum

issue #, date

Buffet and Berkshire Hathaway: Luck or Skill? By Yiwen Wang

Over the 47 years ending December 2011 Berkshire Hathaway has achieved an average after-tax rate of return in excess of 20% p.a. Comparing this figure with the market average (S&P 500) of 9.2% p.a, the performance of Berkshire has consistently beat the market average. This long-term outperformance has lead to an overall gain of 513,055% - that is, one could become a millionaire in 47 years period if he had invested $2 in Berkshire at the start. Hence one may wonder what is the secret to such exceptional success? Is Berkshire Hathaways performance out of luck? Or is the man behind the company attributable to some of its success? The History of Berkshire Hathaway Back in 1889, Berkshire begun as a textile company that dealt with manufacturing textiles and cotton. At that time, the business used millions of capitalized assets and thousands of looms for production, making Berkshire one of the largest cotton textile companies in the world. However, the boom of textile production didnt last; after the First World War, Berkshires business started to decline. The company faced a downsizing challenge their capitalized assets became idle capital because they did not generate any income to the company. Berkshires name and reputation started to build in 1965, when the company sold its major shares to Warren Buffett (now chairman in Berkshire Hathaway Co.) and his partner Charles Munger (now vice-chairman). This coincided with a significant change in the companys investment under Buffetts management. Buffett believes a stewardship management is of importance; creating a long-term ownership orientated management system where executive performance is measured by profitability. By this, the managerial system will lead to an improvement of real return on capital, and that is by making use of idle capital from the origin of textile business or by deployment its capital. Buffetts Key Investment Principal Nowadays, Berkshire Hathaway Inc. is an international holding company that has engaged in myriad business activities globally; its subsidiaries are diversified into insurance, retailing, manufacturing, utility, publishing and banking. What are the characteristics Buffett look for when he deciding on possible investments, and consequently lead

Berkshire to such a success? By scrutinizing Buffetts conservative portfolio, it is found that Buffett has a tendency to invest in outstanding businesses (large-cap growth) under active trading market. Those acquired business types were from a variety of industries, including the manufacture, service, financial, media, insurance, and utility sectors. This included Washing Post Company (1980), Blue Chip Stamps (1983), National Indemnity Group (1983), American Broadcasting Company (1985), Scott & Fetzer & Fechheimer Bros (1986), Coca Cola (1989) as such. Buffett believes that a hold business must be financially sound if the full potential of the business is to be realized. Therefore, observing the hold businesss products, its competitors and products, as well as its leverage (e.g. the ability to borrow money the business employed) reflects his definition of risks. When it comes to determining if a business is good, Buffett also looks at the return of equity, profit margins, and how wisely they employ their CFs (their management team and strategic plan). He then makes the business judgment after considering all the previous characteristics. In that way, he understands the discovered business well, and it is able to predict its future cash flows. Luck or Skill? Michael Lewis, the famous financial journalist and author, stated in 1989 that The reason [Buffett] is so rich is simply that random games produce big winners Michael put forward his view on Buffett in his best-selling book The Big Short (2010): The more he studied Buffett, the

3 3

lorem ipsum

issue #, date
Cont. from page 3 the less he thought Buffett could be copied; indeed, the lesson of Buffett was: To succeed in a spectacular fashion you had to be spectacularly unusual. But can Berkshires performance be explained by chance? Retrospectively looking at Berkshires Corporate Performance comparing to S&P 500 Performance: there was 8 years when the return of Berkshires stock was lower than the return of S&P 500 over the past 47 years; in any consecutive 2-year period, there was 2 out of 46 two-consecutive years that Berkshires stock is underperformed; and in any more than 2 consecutive years, it was impossible to generate a lower than market return. Figure found that the likelihood of Buffett beating the market in at least 39 of the 47 years is 0.0000028. That means, if we had around 1 million random investors, then maybe three of them would obtain Buffetts record or better. Berkshires consistent outperformance cannot be simply attributed to luck. This conclusion coincides with Buffetts view that a concentration of winners that cannot simply be explained by chance that can be traced to this particular intellectual village. It is his skill that leads to the outperformance of the market over the period of more than 45 years. And the esoterica of his investment skill is: to purchase shares in good businesses when market prices are at a large discount from underlying business value. n

A few words with Nathan Lau

FINSOC consists of a large team of dedicated individuals hoping to assist, inform and inspire students interested in the opportunities the finance industry has to offer. Here at the ANU branch, our accomplishments this year could not have been realised without the inspiring leadership of president Nathan Lau. With the year drawing to a close, the outgoing president leaves us with his some of his most valuable experiences and tips. Greatest accomplishment Looking back now, I think that the greatest accomplishment for me was the expansion of FINSOCs brand name within ANU as well as the adding of value for our members. This includes having a larger range of sponsors and events, especially more informative and beneficial ones. For example, we managed to have our very first networking workshop with ANU Careers Centre, and the launch of our very first Investors Night series. I am also glad to be able to witness the success of our first ever publications team. However, all these would never have been possible without the help of the whole committee and I am just glad that they are all in FINSOC, like me! Greatest challenge Dreams will always be dreams, until you take the first step. I think that the greatest challenge for me was to ensure that I could properly transform my vision to reality. This was the hardest for me as FINSOC, being a relatively new society, had (still does have) a lot of untapped potential yet I had to take things one step at a time. Too little growth would be ridiculous, while a spurt in growth would not guarantee a strong foundation for future generations. It really takes patience and realistic milestones to ensure the sturdy advancement of an enterprise, and student societies are no exceptions too. To give you a comparison, even the so-called overnight sensation Draw Something, took the company six years of struggles before finding its footing. (I am glad we have already found ours, now it is just a matter of compounding on that like an exponential distribution J)

Advice for students seeking a leadership position I would say, Go for it! However, I would advise them to reflect on their motivation for taking up the position. If it is for fame and materialistic gains, you are going to have a bad time. (Meme intended) Leadership requires the individual to pursue their vision with passion. Without passion, it becomes a chore and you will start disliking everything associated with it. The key is to go after something you really enjoy doing, rather than the mere pursuit of power. I would also advise leaders to remain humble, as you are nothing without your team and supporters. n The newly elected management committee for 2013: President: Jessica Wang Treasurer: Ng Kar Yen Secretary: Emily Lam Vice President of Firm Relations: Jason Sun

4 4

lorem ipsum

issue #, date

A beginners guide to Personal Branding by Ashley Ding

What do Coca-Cola and JP Morgan have in common? Not much but for one, they are both brands. Products have brands, corporations have brands and even celebrities have brands. Branding is critical to how consumers view a product and whether they buy into it or not. Similarly, our own personal branding affects how we are viewed by our employers and colleagues, whether we get a job and ultimately, how we progress in our future careers. When you interact with people, online or offline, they will build up an image of you. So you want to make the right impression, especially when you are competing with hundreds or perhaps even thousands of other students for just a couple of graduate positions. Step 1: Define Your Brand The first thing to do is to think broadly about your personality, interests and hobbies. Do people call you a neat freak? Do your mates ever refer to you as a math genius? Do people just love being with you for your killer sense of humour? Well, this is what makes you different! So, make a list of words that best describe the features of your personality now. Moreover, you need to consider what influence you want to bring to people around you and society. For example, you may volunteer to help disabled kids. Your positive influence on those kids can be included in your brandinggiving back to the community. Step 2: Create Your Brand Once you know what kind of image you want to show to the world and the skills that you want to emphasize, it is the time to show people what you represent. 1. Resume These two pages are often the first thing potential employers will see of you. It is the first flash of your personal brand. As a rule, a CV should be easy to read and worth reading. You should show the aspects of your background that make you unique and suitable for the particular position you are applying for. Develop a strong career goal A very short sentence provides a quick summary of what you have accomplished and what you want to be in the (near) future. Turn your duties into initiatives and skills Dont just list your duties or responsibilities you were given on your job. It is better to brand yourself by your initiatives. Talk about what skills you developed

2. LinkedIn Profile LinkedIn is a social networking website for people in professional occupations or those looking to find one. A LinkedIn profile is a combination of a resume and a database of your networks. LinkedIn also allows users to research companies which they may be interested in working for and create networks with other professionals theyve met. So you can advertise yourself through this medium and create opportunities for yourself by connecting with prospective employers.

lorem ipsum
3. Facebook Profile

issue #, date

As of June 2012, Facebook has over 955 million active users, but most of them never brand themselves properly through this medium. You need to decide what is appropriate to share with the world. Remember that what you post often can be viewed by both personal and professional contacts. Employers are known to Google or Facebook stalk employees and prospective employees. Be sure to include a Facebook profile picture of just you and avoid any unnecessary Vodka bottles. Try to post content that could add values to your brand when contributing to the knowledge pool. However, be respectful when making comments on sensitive subjects and do not use insults and racial slurs. 4. Wardrobe What you wear can add or detract to the value of your personal brand. Select clothes that best represent and enhance you and help you stand out among the crowd. Step 3: Buy Into Your Own Brand Like it or not, you are a unique personal brand. In order to sell yourself in the competitive labour market, you need to know your strengths and opportunities. You have to become confident to believe in your brand, then you can convince a hiring manager why they should buy into you as well. So, as long as you buy into your own brand first, people who you are targeting at will start showing their trust in you. At the end of the day, you will feel inspired with confidence to face any challenge ahead and be ready to make a difference in the future. Time to Take Action Take a few minutes right now to sit down and figure out who you are and what you want to be known for so that you can take control your reputation and position yourself professionallycreate your digital footprint, build your network and join the conversation by commenting and start a blog. In this way, you can generate new opportunities and achieve career success

Would you like to contribute?

Whether its a financial opinion, news feature or discussion piece, the FINSOC team are always interested in what you have to say! Send your contributions (400 words or less) to the Editor at phoebe.jin@finsoc.org.au Entries will be published in the following issue Join the team! FINSOC will be recruiting in 2013. Make sure you keep up to date with whats happening on Facebook: www.facebook.com/finsocanu 6 6